HIGHLIGHTS

California Governor Jerry Brown signed Assembly Bill (AB) 398
into law on July 25, 2017. The legislation extends California's
cap-and-trade program, which would have expired in 2020, until
December 31, 2030. AB 398 aims to ensure California meets its
target to reduce greenhouse gas emissions to 40 percent below 1990
levels by 2030.

It authorizes the California Air Resources Board (CARB) to
establish declining emissions limits for businesses that are
subject to state emissions regulations.

It reduces the amount of carbon offsets businesses can use to
comply with the program, and requires that half of the offsets
provide direct environmental benefits in California.

It establishes a "Compliance Offsets Protocol Task
Force," to advise CARB on approving new offset protocols
"while prioritizing disadvantaged communities, Native American
or tribal lands, and rural and agricultural regions."

The impact on the offsets industry and the businesses that
comply with the cap-and-trade program depends on how CARB
implements AB 398 in its 2030 Scoping Plan.

Legislation Overview

AB 398 passed in both the California State Senate and Assembly
with a two-thirds majority of bipartisan lawmakers. It received
support from businesses and environmental advocates alike. Governor
Jerry Brown signed the bill into law Tuesday, July 25, 2017. The
legislation extends California's cap-and-trade program from
December 31, 2020 through December 31, 2030.

The legislation indicates that it intends to ensure California
continues to meet its ambitious climate change goal to reduce
greenhouse gas emissions to 40 percent below 1990 levels by the
year 2030 (Senate Bill 32, passed into law on September 8,
2016).

However, it contains important changes to the current
cap-and-trade program that will impact businesses participating in
the program. It authorizes CARB to implement lower emissions limits
that decline between 2020-2030 for businesses subject to the
cap-and-trade regulations. It also authorizes CARB establish a
price ceiling, and to set "price containment points"
below the price ceiling, after considering the "need to avoid
adverse impacts on resident households, businesses, and the
state's economy."

Carbon Emissions Offsets

Notably, the legislation reduces the use of out-of-state carbon
offsets, as follows:

"(I) From January 1, 2021, to December 31, 2025,
inclusive, a total of 4 percent of a covered entity's
compliance obligation may be met by surrendering offset credits of
which no more than one-half may be sourced from projects that do
not provide direct environmental benefits in state.

(II) From January 1, 2026, to December 31, 2030, inclusive, a
total of 6 percent of a covered entity's compliance obligation
may be met by surrendering offset credits of which no more than
one-half may be sourced from projects that do not provide direct
environmental benefits in the state."

The legislation defines "direct environmental benefits in
the state" as a "reduction or avoidance of emissions of
any air pollutant in the state or the reduction or avoidance of any
pollutant that could have an adverse impact on waters of the
state."

On its face, the legislation strengthens the cap-and-trade
program, as it provides certainty to businesses that the
cap-and-trade program will continue through 2030. Its stricter
requirements for declining emissions, declining allowances, and
price ceilings will likely continue to drive the demand for offsets
projects, particularly those located in the state. That is
important for businesses to contain their costs of complying with
the cap-and-trade program.

However, it remains to be seen how CARB will apply these
parameters to carbon offsets projects. As it currently stands, the
legislation raises questions as to how to treat carbon credits from
projects located at state borders or on tribal reservations. The
legislation could also affect cap-and-trade and offset credit
programs in other states and in Canada, which are linked to
California's cap-and-trade program. It remains unclear how CARB
will apply the legislation's requirements to projects located
in jurisdictions linked with California.

CARB will likely address these issues in a rulemaking proceeding
on its 2030 Scoping Plan, inviting stakeholders to submit comments.
Currently, CARB aims to finalize its 2030 Scoping Plan by 2018.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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